Outlook & Valuation: Though PFC’s asset quality improved remarkably in 9MFY18, it was affected negatively in Q4FY17 mainly due to shifting of NPA recognition norm to 120 days past due (dpd) from 150 dpd. Again, PFC will be shifting to a recognition norm for NPA to 90 dpd vs the current 120 dpd and will take the impact of additional provisioning from this migration, if any, in Q4FY18. Hence, uncertainty to linger on the stock price. However, we believe that only sole attraction towards the company would be attractive dividend yield (~9.0% in FY18) and we expect it to continue in the coming years as well. While we revise our target price downwards to Rs 97, we upgrade rating to BUY from Hold given the recent fall in stock price (↓29% in last three months). We rollover our valuation to FY20E and reduce our target multiple to 0.8x on FY20E ABV (earlier 0.9x on FY19E ABV) to capture uncertainties around credit cost and private restructured assets.
Maintain BUY with rolled forward TP of Rs 135 (1x FY20E ABV): Management's optimism on improvement in asset quality, by upgrades, is gradually playing out; however, we remain watchful on the same. The stock can see significant delta on ABV based on upgrades from the NPAs. Moreover, improving loan growth and maintaining margin remains a key challenge. We cut our FY19 estimates by 9% factoring in lower margins.
Power Finance Corporation’s (PFC) Q3FY18 earnings were below estimate on interest income de-recognition (of INR6.5bn) in SDR/S4A account (of INR101bn). Meanwhile, earnings were supported by provisions write-back (of INR2.2bn) given upgrades from stress pool. Encouragingly, Q3FY18 marks the quarter where upgrades have been crystallising on a guided path (INR67.5bn from NPL, INR13.7bn from restructured book); consequently, stress pool (NNPL plus restructured) fell to 26.0% (29.5% in Q2FY18)—a trend management believes will sustain. Meanwhile, operating performance was soft as NII fell >30% YoY, a derivative of lower NIMs (down >30bps to 3.85%, interest income reversal) and softer <10% loan growth (muted derivative). Given softer core metrics, we are revising down FY18/19E our EPS estimates by 8%/9%. At CMP, the stock trades at 0.7x FY20E P/BV for RoE of 14-15%, rendering favourable risk-reward. Maintain ‘BUY’ with TP of INR171.
Power Finance Corporation (PFC) reported steady Q2FY18 performance with earnings beat supported by lower provisions. While one fresh account (East Coast Energy – ~INR12bn) slipped into NPLs, upgrade of MP Genco loans (INR110bn) led to >30% QoQ decline in GNPLs (to INR215bn at 8.33% from 12.5%). Moreover, even while there was no fresh restructuring, restructured book rose to INR590bn (up 8% QoQ) as upgrade of MP Genco Loans (INR56bn) partially happened to restructured book. Encouragingly, Q2FY18 marks the quarter where upgrades have started crystalising with further upgrades (INR70bn from NPL, INR13bn from restructured book) expected in Q3FY18. Meanwhile, operating performance was soft as: a) NII declined >5% YoY, a derivative of lower NIMs (down 25bps to 4.2%) and softer <10% loan growth. Given quarterly earnings volatility, we are not revising our FY18/19 estimates. At CMP, the stock trades at 0.8x FY19E P/BV for RoE of 16‐18%, rendering favourable risk‐reward. Maintain ‘BUY’.